SFS: Collateral management solutions in the Kingdom
02 May 2025 Saudi Arabia
Image: Justin Lawson
Setting the tone for the ‘Collateral Management and Solutions in Saudi Arabia’ panel at this year's Securities Finance Times Middle East Symposium in Riyadh, Saudi Arabia, moderator Ricky Maloney, Qatar country executive and head of GCC region at Davies Group, quipped: “If the answer is not among these four, you won’t find it anywhere!”
Though the Saudi market has seen its sovereign bodies involved in securities finance for some time, for non-government related entities in the country (and region as a whole), the concept is fairly new. This gave proceedings an interesting tone — panellists having to address the simple questions and ideas, and not just the more complex and intricate that we sometimes see.
First among these questions was, why should an asset owner engage in securities lending?
Naturally, the opportunity to bring in additional revenue is “paramount”, said Simon Squire, global head of product management at BNY. When you are holding securities for the long term, he noted, it brings an opportunity to lend them out. The risks, he pointed out, can be managed by collateralising the loan.
Touching on a theme seen across a number of panels during the day, he highlighted the preference for the use of cash as a collateral. This is natural in a market where securities finance is still in its infancy, but Squire reiterated the point of using securities as collateral as well. Using your owned assets as collateral, he suggested, allows a firm to leverage its balance sheet in an efficient way.
In this area, Greg Donovan, vice president, collateral services, State Street, offers some advice: “Think about collateral at the point when you are thinking about the thing you will need collateral for.” It should be an active process, he highlighted, with firms keeping the end goal in mind when looking at what their obligations are, legal framework, and what assets they wish to use.
The importance of collateral goes beyond this, however. The efficient use of collateral, and the benefits it brings, is a facilitator for the wider market as the region develops, underscores Will Jeffries, executive director and head of international sell-side trading services sales at J. P. Morgan.
Squire reiterated this point, suggesting that while collateral is there for the event of default, it is fundamental to financing flows.
The use of triparty was another major area of discussion during the panel.
Triparty, of course, brings a third-party custodian into the collateral process. This means, observed Jeffries, that collateral is centralised, allowing for automation and mobilisation — “putting it in the right place at the right time”.
But the benefits go far beyond this, compared to bilateral arrangements.
Squire emphasised that with just two parties, there can often be scaling costs. A triparty arrangement — due in large part to the size and expertise of the triparty agent — can help accurately value assets, assess their eligibility, and therefore reduce costs.
As Donnovan put it: “The key part is the prefix ‘tri’ — you have a large, independent party, working to ensure that all collateral obligations are fulfilled for the benefit of both sides of the trade.”
Emphasising this efficiency and expertise in recent real-world examples seen at BNY, Squire noted that even despite recent geopolitical turmoil hitting markets globally, “we didn’t miss a heartbeat”.
Coming back to the country’s — and region’s — preference for cash collateral, the panel were seemingly of one mind; while cash is seen as easier, and is usually the preference in the less-developed markets, it comes with additional costs and missed opportunities.
Speaking of the extensiveness of cash, Donovan called attention to the fact that if you are using cash for collateral, you are not using that cash for something else. In the case of an active fund, for example, freeing up that cash will mean having more money to put towards the funds primary, money-generating, purpose.
With the symposium being held in the Kingdom of Saudi Arabia (KSA), naturally the question arose — is there growing demand for the use of KSA securities as collateral?
Again the panel were in alignment with their overall view — there is growing demand, and a lot of enthusiasm, but there is still a long way to go.
Chief among some of these considerations are local regulations and Shariah law.
One area where these concerns still need to be addressed, Jeffries flagged, is in refinancing of cash collateral — the (potential) need for reinvested collateral to also be Shariah-compliant. He noted that as lending grows, liquidity increases but that will increase costs, meaning “an efficient refinancing mechanism is key for the next stage”.
Ownership transfer was another factor that needs to be addressed when it comes to Shariah law. Here, Jeffries noted, a number of emerging markets in Asia (notably South Korea and Taiwan) offer an example. These are beneficial owner markets where title transfer is a problem, and where the pledge system has been used to mobilise these assets.
Away from these technicalities, another panelist highlighted an often even more practical problem that needs to be addressed when using KSA securities in international markets — the working week is different, with Saudi Arabia working a standard week of Sunday to Thursday, while the majority of the world works Monday to Friday.
Again, the panel was unanimous on one key point; this is an exciting time for the securities finance market in Saudi Arabia.
Though the Saudi market has seen its sovereign bodies involved in securities finance for some time, for non-government related entities in the country (and region as a whole), the concept is fairly new. This gave proceedings an interesting tone — panellists having to address the simple questions and ideas, and not just the more complex and intricate that we sometimes see.
First among these questions was, why should an asset owner engage in securities lending?
Naturally, the opportunity to bring in additional revenue is “paramount”, said Simon Squire, global head of product management at BNY. When you are holding securities for the long term, he noted, it brings an opportunity to lend them out. The risks, he pointed out, can be managed by collateralising the loan.
Touching on a theme seen across a number of panels during the day, he highlighted the preference for the use of cash as a collateral. This is natural in a market where securities finance is still in its infancy, but Squire reiterated the point of using securities as collateral as well. Using your owned assets as collateral, he suggested, allows a firm to leverage its balance sheet in an efficient way.
In this area, Greg Donovan, vice president, collateral services, State Street, offers some advice: “Think about collateral at the point when you are thinking about the thing you will need collateral for.” It should be an active process, he highlighted, with firms keeping the end goal in mind when looking at what their obligations are, legal framework, and what assets they wish to use.
The importance of collateral goes beyond this, however. The efficient use of collateral, and the benefits it brings, is a facilitator for the wider market as the region develops, underscores Will Jeffries, executive director and head of international sell-side trading services sales at J. P. Morgan.
Squire reiterated this point, suggesting that while collateral is there for the event of default, it is fundamental to financing flows.
The use of triparty was another major area of discussion during the panel.
Triparty, of course, brings a third-party custodian into the collateral process. This means, observed Jeffries, that collateral is centralised, allowing for automation and mobilisation — “putting it in the right place at the right time”.
But the benefits go far beyond this, compared to bilateral arrangements.
Squire emphasised that with just two parties, there can often be scaling costs. A triparty arrangement — due in large part to the size and expertise of the triparty agent — can help accurately value assets, assess their eligibility, and therefore reduce costs.
As Donnovan put it: “The key part is the prefix ‘tri’ — you have a large, independent party, working to ensure that all collateral obligations are fulfilled for the benefit of both sides of the trade.”
Emphasising this efficiency and expertise in recent real-world examples seen at BNY, Squire noted that even despite recent geopolitical turmoil hitting markets globally, “we didn’t miss a heartbeat”.
Coming back to the country’s — and region’s — preference for cash collateral, the panel were seemingly of one mind; while cash is seen as easier, and is usually the preference in the less-developed markets, it comes with additional costs and missed opportunities.
Speaking of the extensiveness of cash, Donovan called attention to the fact that if you are using cash for collateral, you are not using that cash for something else. In the case of an active fund, for example, freeing up that cash will mean having more money to put towards the funds primary, money-generating, purpose.
With the symposium being held in the Kingdom of Saudi Arabia (KSA), naturally the question arose — is there growing demand for the use of KSA securities as collateral?
Again the panel were in alignment with their overall view — there is growing demand, and a lot of enthusiasm, but there is still a long way to go.
Chief among some of these considerations are local regulations and Shariah law.
One area where these concerns still need to be addressed, Jeffries flagged, is in refinancing of cash collateral — the (potential) need for reinvested collateral to also be Shariah-compliant. He noted that as lending grows, liquidity increases but that will increase costs, meaning “an efficient refinancing mechanism is key for the next stage”.
Ownership transfer was another factor that needs to be addressed when it comes to Shariah law. Here, Jeffries noted, a number of emerging markets in Asia (notably South Korea and Taiwan) offer an example. These are beneficial owner markets where title transfer is a problem, and where the pledge system has been used to mobilise these assets.
Away from these technicalities, another panelist highlighted an often even more practical problem that needs to be addressed when using KSA securities in international markets — the working week is different, with Saudi Arabia working a standard week of Sunday to Thursday, while the majority of the world works Monday to Friday.
Again, the panel was unanimous on one key point; this is an exciting time for the securities finance market in Saudi Arabia.
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